Supply shortages in Toronto, Vancouver left house prices to rise again

New study by the CMHC says home construction in Toronto and Vancouver failed to keep pace with surging demand

Home construction in Toronto and Vancouver failed to keep pace with surging demand between 2010 and 2016, leaving prices house prices to rise again – according to a new report from Canada’s federal housing agency.

Home prices soared 40 per cent in Toronto over the period examined and 48 per cent in Vancouver.

While conventional economic factors such as population growth, migration to cities and low mortgage rates were important drivers behind those increases — accounting for 75 per cent of the price jump in Vancouver and 40 per cent of the rise in Toronto — a “weak supply response” to surging demand was also a crucial factor, the report found.

“Large Canadian centres like Toronto and Vancouver are increasingly behaving like world-class cities,” said Aled ab Iowerth, deputy chief economist at the CMHC. “When you have weak supply responses, as you do in these markets, prices have nowhere to go but up.”

Data gaps have prevented the federal housing agency from fully understanding what’s behind the supply shortfalls in Toronto and Vancouver or why they have grown so vast in comparison to Calgary, Montreal and Edmonton. Supply responses were stronger in each of the latter three cities and price increases were more modest.

“What seems to be happening in Calgary and Edmonton is when demand comes along, the cities are spreading horizontally, so there’s a bit of sprawl going on,” ab Iowerth said.

Montreal already has a large rental sector, a greater comfort living in denser housing, and more readiness to convert industrial land to other uses, he added.

In Toronto and Vancouver, a number of factors including the availability and price of land have prompted supply efforts to shift away from single detached houses and toward condominiums and more expensive high-end homes. These market forces have coincided with municipal and provincial policies encouraging increased housing density.

Though the objective is to combat urban sprawl, “densification … needs to increase the supply of all housing,” the report states.

The supply problems in Toronto and Vancouver are largely due to government policy interventions that focus on the demand side of the housing market equation, said Benjamin Tal, deputy chief economist at CIBC World Markets Inc.

House prices to rise again

Ontario and British Columbia have introduced measures to cool markets in Toronto and Vancouver, including taxes on foreign buyers. New stress testing rules, making it harder to qualify for mortgages, were brought in earlier this year by the Office of the Superintendent of Financial Institutions (OSFI).

Tal pointed to Ontario’s Places to Grow Act, which sets out land-use planning and development rules for the Toronto region up to 2031, as “the number one reason home and land prices are going up in the Greater Toronto Area.”

Under the policy, land is released based on projected population growth and density targets. Ontario is 40 per cent into that trajectory, but implementation of the plan is 10 per cent behind, he says.

“This, in my opinion is the dominant issue. Vancouver has a geography problem. It’s an island, basically, and there’s no room to build, but Toronto has a policy problem and supply will only get worse over the next 10 years.”

Even though official data suggests the involvement of foreign investors in Toronto and Vancouver housing markets is limited, their “perceived impact” could be influencing the prices buyers believe they should pay for a home, the CMHC report stated. A survey by the agency found that 52 per cent of buyers who purchased a home in these cities believe foreign buyers are having an influence in those cities.